Keep the Flak Jacket On

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The Nasdaq fell more than 6% overnight, yet the ASX 200 is holding up as investors pile into banks and defensives. That rotation masks the damage in smaller stocks.

The first line of yesterday’s market update to members of my trading service Retirement Trader was ‘Is it safe to take the flak jacket off?’

After seeing what happened overnight in the US, the answer is clearly ‘No!’

I have given you plenty of warnings recently about the waning momentum, pointing out last week that the weekly trend was about to turn down in the S&P 500 and Nasdaq.

We have already seen plenty of bloodletting in the smaller end of the market in Australia.

When trouble hits, the knee-jerk reaction is to pile into banks and other defensive sectors, such as consumer staples, infrastructure, and insurers.

So rather than an exodus, we see a rotation that allows the index to tread water.

The Japanese Nikkei and South Korean Kospi index are both down over 6% today. As I’m sure you’ve heard, the AI trade is coming under pressure, with fears the Democrats will dial back the rollout of data centres.

That will mean data centres already in the pipeline could be the big winners. Perhaps the sell-off in neoclouds could be a buying opportunity, similar to the opportunity in cybersecurity stocks during the Saaspocalypse.

Commodities are flying all over the place, with oil prices nudging US$117 last week before collapsing to a low of US$93 this week.

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